The Economic Order Quantity (EOQ) model is a mathematical formula used to determine the optimal order quantity for inventory management. The EOQ model aims to balance the cost of ordering inventory with the cost of holding inventory.
The EOQ formula is as follows:
EOQ = √(2DS/H)
Where:
- D is the annual demand for a product
- S is the cost to place an order
- H is the holding cost per unit per year
The EOQ formula assumes that the cost of ordering and holding inventory is constant and does not change over time. In practice, these costs can be influenced by a variety of factors, such as production cycles, demand patterns, and supplier lead times.
The EOQ model is a useful tool for optimizing inventory management by determining the most cost-effective order quantity. By ordering the right amount of inventory, a company can reduce the cost of ordering and holding inventory, leading to increased efficiency and profitability.
It’s important to note that the EOQ model is a simplified approach and may not always provide the optimal solution for all businesses and products. Other factors, such as production constraints, delivery schedules, and demand variability, may also need to be taken into account when making inventory decisions.